Gas Flaring Reductions and the Clean Development Mechanism (CDM)

1. NOT AN OFFICIAL UNCTAD RECORD Gas Flaring Reductions andthe Clean Development Mechanism (CDM) Lucas Assunção Coordinator BioTrade and Climate Change Programmes UNCTAD, Geneva UNCTAD/Earth Council Carbon Market Partnership

2. Agenda • The Kyoto Protocol • The Clean Development Mechanism (CDM) • The emerging carbon market • CDM challenges and opportunities for gas flaring reduction projects UNCTAD/Earth Council Carbon Market Partnership

3. The Kyoto Protocol: Architecture • Caps emissions of greenhouse gases (GHG) by industrialized countries (Annex I) • combined emissions are reduced by at least 5% of their 1990 levels by the period 2008-2012 • Industrialized countries have access to 3 “flexibility” mechanisms • to minimize the cost of reducing emissions (flexibility) UNCTAD/Earth Council Carbon Market Partnership

4. The Kyoto Protocol as a “cap & trade” system • Collective problem-solving approach • As a group, reduce GHG emissions by X amount in X time to reduce concentrations • Flexibility with regards to • Measures – technology used, policy tools, etc. • Allocation of emission “quotas” among emitters • Trading “quotas” among each other UNCTAD/Earth Council Carbon Market Partnership

5. “Cap and Trade” analogy • 10 passengers share a boat to cross a river • Due to river conditions, boat has now to be lighter but should still accommodate same 10 passengers • The carry-on bags in which we all put our “things” now needs to be smaller • From now on, our “stuff” will have to fit in the smaller bag • If you have extra “space” in the bag, you can trade it with someone who needs the extra space UNCTAD/Earth Council Carbon Market Partnership

6. Why cap & trade is preferred policy • Drives down the costs of achieving environmental objectives • Acid Rain: from $1,000s to $100s (see next slide) • Gives industry space to change and adjust • Feeds on diversity of marketplace and differences in abatement costs • Drives innovation and efficiency • So the bigger the market, the better • But this also results in “winners and losers” UNCTAD/Earth Council Carbon Market Partnership

7. US SO2 Prices UNCTAD/Earth Council Carbon Market Partnership

8. Kyoto Protocol’sFlexibility Mechanisms • Classical “cap & trade” mechanism • International emissions trading (ET) – trading of emission “quotas” among industrialized countries (AAU) • “Offset” mechanisms • Joint Implementation (JI) – emission reduction credits resulting from offset projects in other industrialized countries (ERU) • Clean Development Mechanism (CDM) – crediting of certified emission reductions resulting from offset projects in developing countries (CER) UNCTAD/Earth Council Carbon Market Partnership

9. What is the Clean Development Mechanism • KP mechanism that defines project activities which reduce GHG emissions or increase CO2 sequestration implemented in developing countries • Purpose: • To support developing countries in achieving sustainable development through the implementation of project activities that reduce GHG emissions • To assist industrialized countries in meeting their GHG emission reduction commitments UNCTAD/Earth Council Carbon Market Partnership

10. CDM overview CDM Project Activity (Methane recovery in landfill) Sustainable Development in developing countries Certified Emission Reductions (CERs) Remove or retire CER from market (NGO) Sell CER through market INVESTORS Use CER to comply with present or future GHG emission commitments UNCTAD/Earth Council Carbon Market Partnership

11. CDM rules from Marrakech • Undertaken in developing countries • CERs may be used by Annex I countries • Voluntary participation approved by each Party • Real, measurable and long-term mitigation benefits • Reductions are additional to any that would occur in the absence of the project • Promotes sustainable development, as confirmed by host country • Does not divert ODA • Should lead to transfer of technology and know-how • Refrain from reductions generated from nuclear facilities UNCTAD/Earth Council Carbon Market Partnership

12. Process/Steps Project Design Project validation Registration Monitoring Verification/Certification Issuance of tradeable credits Key Actors Project Developers Nat’l CDM Office, National Gov’ts CDM Executive Board Project Operators Independent Third Party CDM Executive Board The CDM Project Cycle UNCTAD/Earth Council Carbon Market Partnership

13. The Emerging Carbon Market • In anticipation of the entry into force of KP, a global market is emerging • Fuelled by the perception that the future will be – • “carbon-constrained” (environment) and/or • have to be less fossil-fuel dependent (political economy) • The Dow Jones Sustainable Development Index has outperformed the market UNCTAD/Earth Council Carbon Market Partnership

14. Market Actors • Governments • EU-wide emission trading scheme (starts in 2005) • National emissions trading schemes – Denmark, UK, Norway (early starters) • The Netherlands – ERUPT and CERUPT – emission reduction procurement tender – now joined by other governments like Finland, etc. • Corporations • Corporate-wide: Shell, BP • Procurement/Investment: TransAlta, OPG, Marubeni • Chicago Climate Exchange UNCTAD/Earth Council Carbon Market Partnership

15. Chicago Climate Exchange UNCTAD/Earth Council Carbon Market Partnership

16. Carbon Finance @ World Bank UNCTAD/Earth Council Carbon Market Partnership

17. Market Forecast • We are living in a carbon constrained world. The urgency to control/stop the radical change in the world’s atmosphere and climate will only increase. • Market mechanisms are the preferred policy responses. But this will create winners and losers at various points in time. UNCTAD/Earth Council Carbon Market Partnership

18. Challenges include - Lowering transaction costs Limit on use of credits by industrialized countries “Additionality” issue Promoting CDM investments Ensuring that additional revenue promotes sustainable development Opportunities include – Additional revenue stream More energy-efficient technologies Better practices Greater environmental awareness CDM Challenges andOpportunities: in General UNCTAD/Earth Council Carbon Market Partnership

19. Gas Flaring Reduction Projects: Challenges & Opportunities UNCTAD/Earth Council Carbon Market Partnership

20. Gas flaring and climate change • CO2 emissions from flaring is about 10% of the Kyoto emission reduction commitment of all Annex-I countries (including USA) • Energy wasted through flaring and venting is prodigious • The gas alone is enough to supply all of France’s gas requirements • Venting of associated gas (methane) directly into the atmosphere is unrecorded and is 23 times more potent than CO2 as a greenhouse gas UNCTAD/Earth Council Carbon Market Partnership

21. Economics of gas flaring • About 8 billion standard cubic feet per day of gas is wasted globally (= France’s gas requirements) • There are strong economic reasons to stop the flaring and venting of gas resources • Requires large capital investment that is sensitive to a variety of risk factors UNCTAD/Earth Council Carbon Market Partnership

22. Major challenges for gas flaring reduction as CDM • “Additionality” • Demonstrating Sustainable Development • Competition with other CDM projects UNCTAD/Earth Council Carbon Market Partnership

23. Additionality • Given the economic importance of capturing flared gas and the associated political and regulatory pressures, it is difficult to establish • Whether or not the planned reductions would take place without the proposed CDM project • What amount of reductions can be credited to the CDM project UNCTAD/Earth Council Carbon Market Partnership

24. Demonstrating Sustainable Development • 3 categories of reduction projects • Re-inject associated gas • Improve efficiency of flares • Utilization of gas for energy purposes • Except for last category, projects do not have high visibility impact in promoting sustainable development – a key component UNCTAD/Earth Council Carbon Market Partnership

25. Competition with other CDM projects • Assuming that the carbon market is modest and that prices stay at Euro 3-10 • Other CDM projects may be more attractive than gas flaring reduction projects UNCTAD/Earth Council Carbon Market Partnership

26. Conclusions: Gas Flaring Reduction Projects • Viability & attractiveness of GFR projects is likely to increase as the CDM market grows • In a large CDM market, GFR projects offer highly effective, measurable sources for large amounts of CERs • Uncertainties about gas flaring reduction projects can be reduced by clearer regulatory policy • For more information: • CDM Online Course @ www.LearnSD.org • The CDM Guide @ www.unctad.org/ghg UNCTAD/Earth Council Carbon Market Partnership